Swift Shoe has convertible bonds outstanding that are callable at $1,085. The bonds are convertible into...

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Swift Shoe has convertible bonds outstanding that are callable at $1,085. The bonds are convertible into...

Swift Shoe has convertible bonds outstanding that are callable at $1,085. The bonds are convertible into 23 shares of common stock. The stock is currently selling for $64.30 per share.

Required:

If the firm announces that it is going to call the bonds at $1,085, what action are bondholders likely to take? Clearly but concisely explain.

business finance

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Answer 1

Answer #1

The action that the bondholders likely to take is computed as shown below:

Conversion value of convertible bonds is computed as follows:

= Current stock price x No of shares in to which the bonds are convertible

= $ 64.30 x 23

= $ 1,478.9

As can be seen the convertible value is substantially more than the call value of $ 1,085, hence there will be a strong inducement on the part of the bondholders to convert the bonds in shares.

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Answer 2

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